Wake up, smell the coffee

‘The devil lies in the details.’ To govern effectively, a government needs not only good intentions, but the capacity to incorporate them into the details of its enactments. Three recent examples of the Manmohan Singh government’s failure to do so go a long way in illustrating how even the best-intentioned of governments can chop off its own feet.

A year ago, the Arjun Sengupta Committee proposed a social insurance scheme for the unorganised sector, whose key element was an old-age pension for self-employed workers. Framed to cover 300 million persons, it promised to answer the one question that now obsesses the poor of India — ‘Who will look after me (us) when I am too old to work?’

However, overcautious calculations by the bean counters in the committee and a lack of sufficient oversight yielded a proposal in which workers would still receive only Rs 200 a month as pension after they had made regular contributions for 20 years! Needless to say, the scheme was met with a remarkable lack of enthusiasm and was laughed out of court.

After that, bureaucratic inertia and indifference took over. A recalculation of benefits, among others by this writer, using the universally applied ‘pay-as-you-go (or unloaded)’ principle of insurance instead of the ‘pay-for-yourself (or loaded)’ principle, showed that even without government subvention, the premia proposed to be collected from the workers alone would suffice to pay pensions ranging from Rs 500 a month to agricultural labourers to Rs 1,500 a month to urban insurees. What is more, the ‘lock-in’ period needed to be only eight, and not 20, years.

One might have expected the government to at least re-examine the original proposal, but constant battering at the doors of the ministry, the Planning Commission and the Prime Minister’s Office have produced no rethinking. The scheme is dead and in 2009, the Congress party will pay the price.

A second example is the new set of guidelines governing the setting up of Special Economic Zones. This is an immense improvement on the one that had existed before and was largely ignored by the state governments. It will effectively put an end to the land grab by state governments and real estate speculators that had developed last year. It is likely to stop the setting up of SEZs altogether, by bidding up the price of land to a level that makes investment in creating an SEZ too expensive and too risky to undertake. To see what will follow, all one needs to do is remember what happened to mobile telephony during its first decade in India, before the government abandoned the system of auctioning cellular telephone regions.

To make matters worse, the new guidelines have made no distinction between backward and forward states and given no incentives to the former, either in terms of larger permissible SEZs or preferential tax provisions. Higher initial fixed costs will increase the risk of failure. One will need only a few of these to abort the scheme. (In China, 4,755 out of 7,000 SEZs failed to attract any investment and had to be returned to the communes after lying fallow for 15 years).

The scheme may, therefore, end by conferring a new monopoly on the 80-odd SEZs that have already been approved, nearly all of which are in the industrially advanced states.

What is done is done, but potentially the most serious mistake still lies a few weeks in the future. The government is seriously considering raising the retirement age of its civil servant from 60 to 62. However, the age for senior civil servants may be fixed three years higher, at 65.

While the latter may be a belated recognition of the need to hold on to experienced civil servants, the goal of the former is to reduce the burgeoning pension bill of the central and state governments. This went up seven-fold from Rs 3,271 crore in 1990-91 to Rs 22,410 crore in 2001-02. Since then, reduced interest rates have held down the growth somewhat, but central pensions are expected to reach Rs 25,000 crore this year.

However, it is not what has happened but what is about to happen that is creating nightmares in the Finance Ministry. For, the Sixth Pay Commission is about to start work, and when its recommendations come in, P Chidambaram’s attempts to meet the obligation placed on him by the Fiscal Responsibility Act will fly out of the window. An idea of what could happen may be had from the fact that the Fifth Pay Commission raised the overall salary bill of the central government by 76 per cent in two years, and its pension bill by 86 per cent!

There is bound to be an outcry against a higher retirement age only for some, but the government’s real mistake would be to raise the general retirement age by only two years, instead of five. A reduction of the pension bill by about three quarters for two years (the effect of deferring pension commutation and a wide variety of separation benefits) will only give the fisc a respite. But if this deferment lasts for five years, and if the pensions that become due in this period are paid into an independently managed pension fund instead of being swallowed into the general revenues of government, then six years from now, about two-thirds of the renewed pension payments (at the current rates) will be met by the pension fund.

This will become possible not only because the fund will be earning interest and dividends, but also because during the five years of deferment, the number of pensioners will come down by about a third (the average life expectancy of pensioners who retire at 60 is about 16 years).

Add an equal saving or more in the state pension bills, and this one reform could make the difference between continued progress towards fiscal balance and another frantic round of cutting social expenditures at the expense of the poor.